Telefonica, Telecom Italia Say Network Review ‘Simply Crazy’

Telecom Italia SpA CEO Franco Bernabe
Franco Bernabe, chief executive officer of Telecom Italia SpA. Photographer: Giuseppe Aresu/Bloomberg

Telecom Italia SpA, Telefonica SA and Europe’s other former phone monopolies are bridling at a fresh regulatory review of their profits from copper networks, saying the result may crimp proceeds needed to build faster fiber lines.

The extent of EU regulation of telecommunications investment is “simply crazy,” Telecom Italia Chief Executive Officer Franco Bernabe said at a technology conference in Brussels yesterday. The same day, Neelie Kroes, the EU’s commissioner for digital affairs, said the 27-member bloc would review whether companies charge rivals too much for access to copper lines.

European politicians, desperate to boost the use of faster Web services to meet targets, aid economic growth and catch up with Asia, argue that profits from existing networks may make the phone incumbents less willing to invest in new technologies. The former monopolies, faced with falling revenue in their home markets from traditional voice calls, say the reverse is true as they need copper profits to invest in faster fiber networks.

By taking “copper prices down at the same time as they want to stimulate fiber deployment, that is an equation that doesn’t fit at all,” Jon Fredrik Baksaas, CEO of Telenor ASA, the largest Nordic phone company, said in an interview.

The European Commission yesterday unveiled two consultations to examine prices for regulated wholesale access to copper and fiber networks. The body is also considering how to standardize wholesale pricing rules in EU markets.

High-Speed Targets

Operators weren’t expecting another consultation process before more progress had been made on existing proposals, Vivendi SA CEO Jean-Bernard Levy said.

To catch up to leading countries such as South Korea, the European Commission has called for 50 percent of European households to have Internet connections above 100 megabits per second by 2020, about 10 or 20 times typical current speeds. The body has proposed using some of the EU’s structural funds, which pay for infrastructure in poorer member-states, to finance broadband development in certain areas and called for faster release of unused bands of radio spectrum.

While some former monopolies attacked Kroes’s plans as unwanted regulatory interference, operators that didn’t inherit a network supported her proposal, and said the European Commission needs to reassess how access prices are calculated.

Network Spat

“Network owners in many countries are making excessive profits over their largely depreciated copper infrastructure,” said Ilsa Godlovitch, director of the European Competitive Telecommunication Association. “This means that consumers are paying very high prices and investments on fiber networks are just not happening.”

The association represents operators such as Vodafone Group Plc, the world’s biggest mobile-phone company, and Spanish broadband provider Jazztel Plc.

Cesar Alierta, CEO of Telefonica, Spain’s biggest phone operator, said that the network owners should be able to benefit more from their investments.

“We will not invest for the benefit of those who do not invest,” Alierta said in Brussels, referring to rival operators. “The time has come to make the market rules work.”

The cost of building out next-generation networks is helping drag down telecommunications shares. The 35-company Bloomberg Europe Telecommunications index has declined 16 percent this year. Deutsche Telekom AG and France Telecom SA shares have fallen 10 percent and 23 percent, respectively.

Google Pressure

Access to fast networks is key for operators as the industry develops new business models based on data services and consumers flock to smartphones such as Apple Inc.’s iPhone and handsets based on Google Inc.’s Android system to download music, watch videos online and surf the Web.

One reason for former monopolies’ eagerness to guard profits from copper networks is their failure to develop lucrative new services, said Patrik Karrberg, a researcher in the Information Systems Innovation Group at the London School of Economics.

“They had, and continue to have, the option of going more into services and some have been much better than others,” Karrberg said in an interview. “In the current regulatory environment, data is a commodity, but for a great video service, for example, you can charge much more.”

Most European operators are seeing profits stagnate or decline in their home markets because of competition and mounting investment needs.

Profit Falls

Deutsche Telekom, Europe’s largest phone company, reported a 6.5 percent decline in second-quarter profit before some items. Telefonica saw second-quarter profit slump 27 percent as domestic competition cut earnings. France Telecom, that country’s largest operator, posted a 2.2 percent decline in first-half net income, and is beginning asset sales in Europe to rebalance toward faster-growing markets.

In July, the CEOs of Vivendi, Deutsche Telekom, and equipment supplier Alcatel-Lucent SA presented a joint strategy for ensuring faster deployment of high-speed networks to the EU, including proposals for new investment incentives and limits to some types of regulation.

While former monopolies are calling for less state regulation, they’re also complaining about unfair treatment from U.S. technology companies such as Apple and Google, whose bandwidth-hungry video services have supplanted phone companies’ own online offerings.

‘Afraid of You’

Executives including France Telecom’s Stephane Richard last year called for mandatory payments from Internet companies to telecommunications operators to offset network costs. Since then, the two sides may have become more conciliatory.

Google and France Telecom have held talks on working together to reduce network costs, with other operators in similar discussions, people familiar with the situation said in June. Telenor’s Baksaas said that Google is in talks with operators in an “industry-wide discussion as well as partner discussions.”

“I’ve been speaking to all of them, and they’re afraid of you too,” William Kennard, the U.S. ambassador to the EU, said of Internet companies. “They know that they need access to your customers.”

Operators may also be able to spur profit growth by charging the heaviest users of scarce bandwidth more instead of offering all-you-can-eat fixed- and mobile-data plans.

Phone companies “are going to have to go to consumption-based billing,” said Jim Balsillie, CEO of BlackBerry-maker Research in Motion Ltd. “If someone drives a car 100 kilometers, and someone else drives a car 200 kilometers, it has to cost them half as much.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE